'In the short term you keep your return expectations very, very low; in the medium term be prepared to invest and in the long term growth will come and your returns from stocks will be high.'
Trust Mutual Fund CEO Sandeep Bagla discusses with Prasanna D Zore/Rediff.com the current market crash, the reasons for the crash, and why long term investors can still make money by investing in Indian equities.
"You should invest in mutual funds through SIPs. Take the help of an advisor to identify good funds that meet your requirements and you should have a really long term frame of mind to gain from the India growth story," is Mr Bagla's advice to small investors.
What reasons are responsible for the sharp slump in global equities since the beginning of August?
Multiple reasons: Equity markets (in India) have been going up and up so the valuations are quite stretched. When valuations go up you expect that the economy is going to remain strong and get stronger.
Globally too things have got overheated and the economic data (from the US), especially on the employment side, was far weaker than expected, which sparked off the fears that there will be recession-like conditions in the US and which obviously means that the (US and Indian) economy will not do well and the companies will not do well and the profitability and growth will be impacted.
The other trigger was the Japanese carry trade in yen. Japan has actually been seeing a strong economy and to contain inflation they (Japan's central bank the Bank of Japan) increased rates slightly more than what the market expected. This led to a sharp appreciation in the yen and hence the carry trades started getting unwound.
How is the unwinding of Japanese yen carry trade related to fall in Indian markets? Is there any connection?
All the (global equity) markets are connected sentiment wise. And if you realise that most of the markets have been going up in India and Nasdaq is among the top performing markets.
While there will be some impact of the Japan yen carry trade getting unwound, it (the reasons for fall in global equity markets) is more than that. When there are periods of very low volatility, which India was also seeing, then people take more and more risk.
Whether these people are institutions or traders or the risk models which are based on value-at-risk or VAR, they allow more and more position taking for a certain amount of capital (leverage).
Long periods of low volatility lead to a disproportionate sizing of risks and debt by the players.
When traders undertake these kinds of trades then whatever be the trigger -- today the trigger is the Japanese yen carry trade and lending -- it leads to certain stop losses getting triggered. And because the position size is huge and there is a spike in the volatility, then those positions start getting cut or liquidated.
There might be little direct impact from Japanese yen but it is the internal positioning of the market which when it starts getting unwound takes a shape and intensity of its own.
Is Japanese yen carry trade at play in India equity markets?
It will happen everywhere. So see if everybody is borrowing in yen (because the Japanese interest rates were close to around zero), they will invest in currencies which are strong in high interest rate economies wherever the markets are doing well.
India has been a top performing market, so obviously there will be Japanese yen rates.
Does unwinding of Japanese yen candidate have still more potential to add pain to the global equity markets and Indian equity markets?
Yes, definitely, because we have no idea how much (money that has been borrowed in yen from Japan and invested in the Indian equity markets) has been involved, how much pain is still there.
I will reiterate that it is not only a trigger. The real problem is the buildup of trades because of the low volatilities. This is just a trigger. This is not leading to the problem. If the positions were not there, then this problem would not be there.
Are fears of a US recession exaggerated in your opinion, or is there solid ground for the global markets to fear contraction of the US economy?
The US recession has been coming and going for the last two years. The US recession would happen if there is ceteris paribus -- if no other conditions would change. But now most likely the US Fed will take some action.
The US recession is expected assuming there is no action from anybody. Now, you (the US Fed) will take some action, you will cut rates and you will try to spur the economy. You will never get to know whether recession would happen or not happen because some actions are being taken now.
We expect the US Fed is going to cut anywhere close to 100 basis points this in the next four or five months, which would proactively avert the recession. We will ever get to know.
There are some experts who believe that the US Fed is behind the curve in cutting interest rates. It's too late now...
I would think the other way round. The financial indicators has been good. The market has been doing well. Inflation is actually higher than your (Fed's) target. You have been printing money so much in excess that the US balance sheet and the other G4 countries... balance sheet are close to $20 trillion. It has gone from $3 trillion in 2007 to $20 trillion today and the GDP of the world has not grown so much.
The excess money that we have created is going to create inflation in the future. When the inflation is higher than your target rate, there is no case for reduction in interest rates. But at this point of time I think the US Fed will take growth as a priority (so, there could be cut in US Fed's interest rates to spur the economy) and inflation would probably come later.
In terms of their priority list, they will cut rates. I don't think they have any option right now. But the expectations can swing in a big way.
The benchmark Nifty has corrected almost 1000 points or 4 per cent from its top. How do you look at Indian equity markets as an asset class in the current scenario given this correction?
India is a high growth country compared to other markets. And the (high) valuation comes from the growth possibilities. This (expected high) growth may be on time or may come later. Anybody who's investing in the Indian stock market should have a very long horizon of investments and should be prepared to invest over the medium term.
The way I put it is that in the short term you keep your return expectations very, very low; in the medium term be prepared to invest and in the long term growth will come and your returns from stocks will be high.
Long term would be anywhere between three and five years and medium term would be one and a half years.
As far as the top 500 companies in India are concerned, how do you look at valuations given the quarterly results that we have seen this quarter?
Valuations by historic standards are definitely stretched, which implies that you will have very high growth across companies.
India always has been a stock picker's delight. So there could be opportunities in specific sectors and specific companies.
But if you have a short term horizon then India might not be able to give you a lot of profits.
Speaking about sectors, where do you see value in this market?
I don't think you should think of value in this market. India right now is a growth and momentum investing story. This is not a value investors’ market and given the situation that we have been in, it would be futile to think of India in terms of value investing.
Is this the correct time for investors to chase momentum and growth?
I don't think momentum should be chased right now because there is no momentum right now. If you want some kind of certainty of investment outcome then the only way to invest is for the long term and one should be prepared to keep investing systematically for the next few months.
What would be your advice to small investors who buy equity directly on their own, those who have a small portfolio of say Rs 10 lakh and go for PMS services and those who invest in equities via mutual fund SIPs?
You should invest in mutual funds through SIPs. Take the help of an advisor to identify good funds that meet your requirements and you should have a really long term frame of mind to gain from the India growth story.
Would you suggest any sectors where investors can see growth in the long term?
In sectors like defence and manufacturing there are possibilities that India might emerge as a new avatar where there's a lot of emphasis from the government and while these things will take time to unfold these sectors look attractive to us.
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